The Greenspan Kaput

We can always count on Barron’s Alan Abelson to lay blame precisely where it belongs: At the feet of the maestro, Sir Alan Greenspan:

"To be anxious is not, of course, to be devoid of compassion. And as we watched the great unraveling of that tangled web that financial engineering spun, we couldn’t help but think of the acute discomfort being felt by that outstanding public servant Alan Greenspan, who, during his celebrated tenure as head of the Federal Reserve, more than anyone deserves credit for nurturing the ownership society. Mr. Greenspan, lest we forget, went far beyond the call to entice people, no matter what their circumstances, into buying a home by whacking the cost of credit to as near zero as you can get and still lay claim to being somewhat rational, and urging them to go for those new-fangled adjustable mortgages with deceptively low initial interest rates.

Beyond even his cleverness at blowing successive "smart bubbles," so that the newest one (for example, housing) was nicely calculated to offset the fallout from its burst predecessor (the stock market), and his adroit ability to please his political masters (his overriding passion has always been to be liked), nothing more distinguished Mr. Greenspan’s long stint at the Fed than his timing in departing from that august body.

As his successor, gentle Ben Bernanke, is no doubt becoming ruefully aware, creating a mess is easy. The trick is in knowing when to slip out, leaving someone else with the job of cleaning it up. And here Mr. G has proved himself an undisputed master.

Financial mischief on such a grand scale is not a one-man job, and Mr. Greenspan, needless to say, had a lot of help from Wall Street, Washington and points north, south and west. But there’s no diminishing the singular part he played.

And just as the contempt for risk that made possible the gross extravagances in housing and the financial markets was sustained by confidence that Mr. G would always bail out the participants — the so-called Greenspan put — so the current collapse in housing and the financial markets merits a special designation, one that similarly recognizes his critical role. How about the Greenspan Kaput?"

As previously mentioned, by the time his memoir, "The Age of Turbulence," is released on September 17th, he may not have much of a legacy left . . . 

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Source:
After the Greenspan Put…
ALAN ABELSON
Barron’s August 13, 2007   
UP AND DOWN WALL STREET 
http://online.barrons.com/article/SB118620573381988303.html

What's been said:

Discussions found on the web:
  1. Nels Nelson commented on Aug 11

    I sent the following email to a friend two weeks ago about Greenspan.

    Story has it that Archimedes, when tasked with determining the volume and density of the king’s crown came to the solution while taking a bath. With the realization that he had discovered the answer, he jumped out of the tub and went running into the street naked shouting “eureka”.

    It is rumored that Alan Greenspan had his own “eureka moment” while bathing. It seems that the Maestro spent all of his time pouring over reams of computer printouts of economic statistics. He was known to do this while taking long baths. It was during a long soak that he realized that a significant boost to the economy could be achieved through stimulating the housing market. Although he didn’t run out into the street naked which in my opinion wouldn’t have been a pretty sight if you’ve ever seen Alan Greenspan, he figured this was just what the economy needed after the Dotcom stock market bubble burst and threatened the economy with a severe recession.

    Alan Greenspan lowered interest rates and thus begat the mortgage equity withdrawal perpetual free money housing ATM machine. The creation of a real estate bubble to replace the burst dotcom bubble seemed to be doing the trick. Anecdotal evidence was pouring in from the likes of insurance agents in California telling about customers who had been insuring Hondas and Toyotas that were suddenly insuring Mercedes and BMWs. There was a proliferation of shows touting the easy riches to be made by flipping houses and Horatio Alger like stories of high school graduates making the big bucks selling subprime adjustable rate mortgages, buying and wrecking Enzo Ferraris, dating soap opera stars and financing movies.

    It was great, while it lasted. Signs began to appear in August 2005 that announced the beginning of the end. But unlike the stock market that is efficient and liquid and where prices drop quickly, real estate prices are what economists call “sticky” and fall very slowly. Adjustments in the real estate market take years to happen. So here we are almost two years later and many are just now waking up to the fact of serious problems in the real estate market and its spreading contagion.

    This came from the CEO of AutoNation:

    The chief executive of the nation’s largest publicly traded auto-dealership chain is disputing suggestions that the housing slowdown is contained, attempting to drum up support for interest-rate cuts that would help sagging vehicle sales.

    Mike Jackson, head of AutoNation Inc., … took issue with Federal Reserve Chairman Ben Bernanke’s recent suggestions that the housing slump won’t significantly crimp economic growth over time. “Absent a rate cut, which will both have a financial impact and a psychological impact, I think it’s going to take a long time to work through — a long time,” Mr. Jackson said of the housing correction. “The stress in housing is significant, the stress in automotive retail is significant.”

    All I can say is beware of economists reading economic statistics while taking a bath because pretty soon we’ll all be taking a bath.

  2. W.Edwards commented on Aug 11

    “Mr. Greenspan, needless to say, had a lot of help from Wall Street, Washington and points north, south and west. ”

    What about east as the in the far east? If it wasn’t for all of the Asian countries that have been soaking up US dollar debt and the rise of low-cost production centers such as China, the situation wouldn’t be quite as bad as it currently is.

    Because more US imports are coming from China that has helped keep price inflation low, this was accommodative to the Fed since it allowed them to drop the Fed rate 1% in the early 2000s after the tech bubble crash.

    And with Asia’s own liquidity crisis 10 years ago, they have become big believers in holding greater amounts of liquid foreign reserves as a buffer against local financial crises. As a result, China, Japan et al have provided plenty of liquidity to the US over the last 10 years by soaking up massive amounts of US debt.

    This in turn has screwed up the Fed’s monetary playbook by keeping long-term risk-free rates low even though the Fed tried to push up the whole yield curve a few years back by increasing short-term rates. If the far-end of the yield curve would have moved up as hoped for, the housing bubble may not have gotten so big with the current bust not being so disasterous.

    China in particular, having been so useful to the US 3-10 years ago, has been handed control of US monetary policy through the amount of US debt it holds ($800B) and the US’s dependency that it continue to acquire so much more. In my opinion, the Fed may be somewhat irrelevant over the next few years since the US has already given too much of it’s power away to other nations.

  3. Jdog33 commented on Aug 11

    I have never, ever been a fan of Alan Greenspan. By inflating the bubble (i.e. not raising rates when it was clear we were headed towards an asset bubble) and then raising rates like crazy (and quickly), he ensured the demise of 70 – 80 million baby boomer families.

    I still know lots of folks who are turning 60 that were hit 30 – 50% on their retirements because they got in late to the .com party and stayed until they got run over by the train.

    I put the blame on that squarely on Greenspan’s shoulders.

  4. Chief Tomahawk commented on Aug 11

    Maybe Bush gave Greenspan that medal of honor too soon?

  5. Doug commented on Aug 11

    As we’ve seen, that medal goes to incompetant cronies.

    So while he may have received its early, he would have gotten it anyway . . .

  6. Peris Troika commented on Aug 11

    Paraphrasing, “Short on the rumors,
    Buy back in on the fear-monger news.”
    Buy like there’s blood in the street,
    though the vampiroyals have no blood.

    There is more equity and more liquidity
    now, than sum total of human existence.
    They aren’t making anymore real estate,
    and US immigration is the next big boom.

    The contagion isn’t the underlying asset.
    The contagion is the con they made of it.

  7. RW commented on Aug 11

    Greenspan was in a tight spot back in 2000/01 I think; if the Fed and executive branch could have worked constructively together perhaps some combination of fiscal and monetary policy might have been concocted to work out the bubble aftermath but the Greenspan Fed had already developed the habit of giving the equity market undue weight (IMHO) and, on top of that, the other end of the conversation could only say “tax cut” then “tax cut, war;” not much to build on there.

    But that’s 20/20 hindsight; a lot of reputations have been ruined in putative service to the country the past seven years, why should Greenspan be any different.

  8. scorpio commented on Aug 11

    greenspan’s biggest contribution to the 25-yr boom in leverage and speculation was his hands-off attitude to regulation and supervision of financial markets and key players, because as he never tired of repeating in his Ayn Randian wisdom “markets know better than regulators and are in any event self-correcting”. like he ever let a market correct! bernanke is just as willfully ignorant of how the players are marking certain positions. because the Fed has no idea how the parties are marking their positions or how they’re valuing derivatives, they will be shocked, shocked by the enormity of the problem. hence, no correction. the bucket brigade starts here.

  9. Socalcool commented on Aug 11

    Has Abe Abelson been reading Peter Schift too? If a bubble lasts 25 years, is it a bubble any more?

  10. pj commented on Aug 11

    I dont think that Greenspan would have thought like, hey,let me defer the mess and let the next guy clean it up. It was much simpler in the sense that the economy had a problem at hand and he had some tools to fight it with. What the long term consequences would be was best not thought about.
    What I don’t simply understand is what the problem is if markets fall and Cramer’s friends are on the losing side. After all, as they say, prices fluctuate. Why cant we just let them f$%&*#g fluctuate??? I just so hate the choppers.

  11. techy commented on Aug 11

    pj.

    its not a matter of cramer and his hedgie friend’s losing money….its a question of stability of the banking and financial system…..as some one has said…we getting our next paycheck.

    no matter how much we debate the take home story in every sphere is the same….its all about short term…

    bush wanted the economy to boom at any cost in the short term…..greenspan let it happen by housing boom.

    now they would like the economy not to go in recession…..which is possible if you deflate the dollar (reduce debt) and inflate everything leading to reduction in size of the whole debt problem.

    its not going to be as easy as it was in 2000/01 because right now consumers are stretched to the max on debt factor….they dont have any disposable income to spend.

    unless we inflate by 50% in the next few years….everyone makes 50% more……and we can just go on with the spending binge.

  12. jake commented on Aug 11

    bush was so afraid of not getting re-elected “like his dad” because of an economic slowdown….he told greenspan to lower interest rates to 1%….then he started a needless war…nothing gets money into an economy like a good war.that’s why were in the trouble were in.

  13. Bob A commented on Aug 11

    Imagine if the doodooheads on CNBC stopped talking and actually read some facts once in awhile. Maybe they would stop blaming the problems on borrowers (Dylan R? Bob F?) who sadly trusted Alan Greenspan and George Bush and the ‘ownership society’ marketing fairytale they were lulled into. Talk about buying votes…

  14. Winston Munn commented on Aug 11

    “If a bubble lasts 25 years, is it a bubble any more?”

    At that point I believe the correct term would be derigible – as in Hindenberg.

  15. GerryL commented on Aug 11

    I dont believe in a bailout. However, if there is systemic risk the Fed will have no choice. I am starting to wonder if Wall Street will create systemic risk to force the Feds hand.

  16. stanleyb commented on Aug 11

    I don’t believe we can pin the housing bubble on Greenspan.

    Who is supposed to oversee the mortgage industry? Who enforces against fraud in mortgage approvals? Who held a gun to anyone’s head and said, “You must approve this loan”? Or any fund manager’s head saying “You must buy this piece of crap mortgage/CDO?”

    Following long term demographics, we’re going to see interest rates fall back to 3% as the Baby Boom starts the long process of retirement. The fact is there *is* going to be a lot of money chasing around too little to invest in. Interest rates will be low despite anyone’s best attempts.

    But the liar loans, the 100% loans, the owner-occupied mortgage being used to buy a rental. Or for people like Casey Sergin, to buy multiple rentals in multiple states. The home equity scams. The identity theft. The straw buyers. And many other fraud schemes.

    We’ve had web bloggers able to clearly point out mortgage fraud just using title searches and the MLS system. If any of the 138 lenders that have gone bankrupt so far this year had someone on staff doing the same basic research as these bloggers before approving a loan, they could have said no as well.

    The housing bubble blame lies not with Greenspan, but half with a mortgage industry that ran without even the most basic of checks against client fraud …and half with the absence of government oversight that allowed these mortgage lenders to run free and stupid, built for destruction.

  17. zell commented on Aug 11

    Dead Giveaway: Alan sitting next to H.R. Clinton at Bill’s first State of the Union address- Totally inappropriate for the Fed. Chairman. As JFK had a Dr. Feelgood so has Clinton and Bush.
    To get the gist of what is really going on the summation by Doug Noland at Prudent Bear, et.al will explain what is happening- if Friday’s C.B. actions have left you puzzled. Haven’t gotten round to A.A.’ latest missive yet but A.A. is an old hound dog who follows the scent no matter what the current “wisdom” is. Begin with the role of tripleA leveraging if his stats put you off the feed.

  18. Groty commented on Aug 11

    Very well put, W. Edwards.

    I don’t understand why Greenspan takes so much heat. He had little choice. People and businesses didn’t want to spend after trillions in wealth had been wiped out from the collapse in stock prices. Our already fragile national psyche took another hit after we all watched on TV the horror of 9/11. And to top it off, some kook decides to start poisoning people by sending anthrax through the mail. As a nation, we were paralyzed from shock. Neither businesses nor individuals wanted to spend.

    So Greenspan lowers rates to 1% to stimulate the economy. What else could he do? After leaving them at 1% for about a year, he raised them 17 consecutive times. A total of 425 basis points. During the tightening process, long rates hardly budged.

    The Chinese/Japanese sabotaged his attempt to tighten monetary policy because they needed the U.S. consumer to keep consuming their exports.

  19. yc32 commented on Aug 11

    Yeah, it is so easy to blame Al. Did 90’s bull market has anything to do with him? And, let’s blame 9/11 on Bill Clinton.

  20. pj commented on Aug 11

    techy
    My point is this: If excessive risks are taken (whatever be the reasons); If people start believing that “risk” is dead and money is free, then if it finally comes to such a pass where you have a crash, gloom, doom whatever and people start taking a walk out of their windows; then let it be so.
    That is the price. It is a Fair game if you play it. You cannot have Calvin moving the goalposts, again.

  21. ECONOMISTA NON GRATA commented on Aug 11

    It’s not just a “housing thing” boys and girls, that just happens to be, by coincidence, the first shoe that dropped, the most obvious, if you will. We should change the conversation somewhat to redefine this enchilada for what it really is. I can only suggest the definition currently being bandied about, ” CREDIT CRUNCH”, is not applicable to the circumstances. It is a “SQUEEZE”.

    The problem is with the underlying collateral, not with the loans. I question the value of the collateral not the validity of the loans. That’s why it’s systemic. You can parallel the equity market with the housing market. Take a close look and the Apollo deal, Harras and Reaology. I would like that deal to “POOP ON” and then I would like to use the paper issued for the Chrysler deal, to “WIPE WITH. Please…! If this stuff isn’t “subprime”, I don’t know what is. These are like Miami condos and the sad thing is that the much of the equity market was priced as comps.

    That, my dear friends is the issue and in order to keep the metaphores consistent, I urge you to find some cover for when the “SHIT HITS THE FAN”….. 😉

    Best regards,

    Econolicious

  22. techy commented on Aug 11

    pj.

    in a fair system….those banks will be supplied short term liquidity….and they will have to mark to market….all those worthless paper they have.

    and all those people who bought homes they cannot afford, will have to either pay by not spending on anything else…or they default.

    and all the assets which are inflated will deflate so that everyone can afford them.

    but we dont live in any such world….from the last 20-25 years we are living in a endless growth high…..the price of which if paid all at once will be very painful.

    hence it will be subsidised with tax payer money….because it is sending the whole system in a shock all at once.

  23. VJ commented on Aug 11

    zell,

    Dead Giveaway: Alan sitting next to H.R. Clinton at Bill’s first State of the Union address- Totally inappropriate for the Fed. Chairman.

    As opposed to Greenie publicly hawking this administrations disastrous tax cuts for the Rich & Corporate ?
    .

  24. Winston Munn commented on Aug 11

    ECONOMISTA NON GRATA wrote: “The problem is with the underlying collateral, not with the loans. I question the value of the collateral not the validity of the loans. That’s why it’s systemic.”

    Econ, I rarely find a reason to quibble with your views, but here I believe there is more involved. The problem in my view is the effects of deflation on Ponzi finance.

    The problem, as always is the case, was inflation – monetary inflation that manifested itself as asset and equity inflation.

    In my view both the the loans and the collateral are equally supsect because both were based on inflated values. Now that the air is whooshing out of the balloon, both the value of the collateral and the quality of the loans are being exposed as emperors wearing no clothes.

  25. ECONOMISTA NON GRATA commented on Aug 11

    Mr. Winston Munn wrote: “In my view both the the loans and the collateral are equally supsect because both were based on inflated values.”

    Yes sir, you are absolutely correct, both…. We can view it as six of these or half a dozen of the other… Inprudent lending is malinvestment, no doubt. However, the identification of such lending, malinvestments was not discovered until the underlying collateral was questioned. Collateral, that I might add, is disappearing into thin air right in front to our eyes. And that sir is where the fear factor lies. As the S&L crisis of 1989 prooved, a microcosm of the current crisis, if you can’t sell the bad assets, you have to sell the good assets, in effect, that makes them bad assets. What a shame, Aye…?

    Econolicious

  26. Bob A commented on Aug 11

    Apologizers for Greenspan/Bernanke etc ignore the fact that you could have read right here for the last several years people saying in detail how this was likely to happen: Appreciation ends. Values go underwater. Interest payments far exceed equivalent rent. Owners walk.

    When rates bottomed in 2003/4 and the refi boom began to fizzle, lenders who had become used to easy money dreamed up and began promoting these various loans that are now responsible for much of the trouble, especially:

    Zero down loans to just about anyone…
    some even offering 110%, even 120% LTV loans (Ditech and others)

    “Option Arms” which allow negative amortization. With rates which adjust MONTHLY based on COFI, CODI, LIBOR etc which were at historical lows (World Savings and Wamu among the biggest purveyors of this scam)

    2,3 and 5 year interest only loans at teaser rates which are now coming due for reset. Many with with rates around 3% now resetting at 6-8%

    All based on the totally ridiculous idea that appreciation beyond the norm could and would continue indefinitely.

    “Who cares if you never pay down the pricipal because the average owner moves every three years and they only way you’re gonna make money on your real estate is through the appreciation.” Loan officers all over the country, many who had been working construction, or hospitality, or doing nothing at all, were trained to sell these loans to trusting buyers.

    And as this was happening Alan Greenspan came out and blessd all of these sorts of loans and trusting (yes naive) consumers believed him.

    But HE IS AN EXPERT. AND HE SHOULD HAVE KNOW BETTER. AND IT IS ALMOST IMPOSSIBLE TO BELIEVE HE DID NOT KNOW BETTER. BUT HE BLESSED THESE KINDS OF LOANS AND IT ENCOURAGED THE SHEEP AS THEY HEADED FOR SLAUGHTER. If I made this big of a mistake in what I did they would call me incompetent and terminate my employment.

    People who have made far less significant errors resulting in ifinitessimally smaller losses to investors are sitting in jails across this country.

    While people like Greenspan get off the hook by coming out and saying ‘oh sorry’ and getting a medal for it while apologists excuse them because he was on their political side of the fence. That’s a little hard to swallow.

  27. zell commented on Aug 11

    VJ: No argument. Just pointing out inappropriate behavior earlier in time- not a partisan hit. Greenspan’s list is a long one.
    I’ve been following A.G. since the 60’s. There has been a profound change in his policy views but what I’m referring to here is a deterioration in his judgement.

  28. stormrunner commented on Aug 11

    This is much worse than a simple credit vrunch it is a debt crisis

    Check ou this article at Roubini’s blog
    http://www.rgemonitor.com/blog/roubini/208166/
    Remember without the catalyst of Debt-Money Fed intervention this process would have been far muted.

    …..Hyman Minsky was an American economist who died in 1996. His main contribution to economics was a model of asset bubbles driven by credit cycles. In his view periods of economic and financial stability lead to a lowering of investors’ risk aversion and a process of releveraging. Investors start to borrow excessively and push up asset prices excessively high. In this process of releveraging there are three types of investors/borrowers. First, sound or “hedge borrowers” who can meet both interest and principal payments out of their own cash flows. Second, “speculative borrowers” who can only service interest payments out of their cash flows. These speculative borrowers need liquid capital markets that allow them to refinance and roll over their debts as they would not otherwise be able to service the principal of their debts. Finally, there are “Ponzi borrowers” cannot service neither interest or principal payments. They are called “Ponzi borrowers” as they need persistently increasing prices of the assets they invested in to keep on refinancing their debt obligations.

    See complete article at link provided.

    Very interesting thesis maybe Eclectic or Winston could speak to the psychology of this.

  29. Elaine Meinel Supkis commented on Aug 11

    When mortgage companies and hedge funds go under, I visit their web pages and read what they say about themselves.

    Without exception, when they talk about the loans they sponsor or generate, they ALL say ‘4 out of 5 applicants are accepted!’ And this is because they wanted and needed the BAD customer, the ones who only qualified for the highest interest rate deals.

    And the hedge funds preferred these high-interest loans to dubious people because they had the best rate of return. This caused the entire system to run off the cliff chasing phantom profits from payments by a bunch of obvious deadbeats.

  30. VJ commented on Aug 12

    zell,

    No argument. Just pointing out inappropriate behavior earlier in time- not a partisan hit.

    No problemo. I didn’t take it that way.

    Greenie sitting next to the First Lady during the first SOTU was intended to show quiet but unstated approval for the administration’s budget and economic legislation, one of the intentions of which was to reduce the exploding Reagan/Poppy Bush federal budget deficits (Of course, his public advocacy was for cutting Social Security and Medicare, a rather bizarre so-called solution to the massive deficits and debt as a result of the Reagan tax cuts). Generic support for sound fiscal policy by the Fed Chairman is supposed to be ‘A Good Thing‘.

    A rather dramatic contrast with Greenie’s performance in regards to this administration’s tax cuts. He not only testified to Congress that they were a good idea, but spoke to business groups and gave interviews to the media in support of them. He clearly adopted a partisan rather than fiscally sound position.

    I wouldn’t consider the former to even be in the same league as the latter.
    .

  31. W.Edwards commented on Aug 12

    To be clear, I’m not saying in my comments above that Greenspan/Bernake are off the hook for all of this. But this is not simply an “it’s his fault because of this” situation.

    There are many different moving parts and many individual players that have added to the current financial stress we’re seeing. The Fed, the US consumers/homebuyers/speculators, emerging/petrodollar countries, Wall Street, hedge funds/pension plans/private equity and mortgage companies all have had a significant role. I was justing point out one that was glaringly omitted from the original article!

  32. me commented on Aug 12

    “As we’ve seen, that medal goes to incompetant cronies.”

    Yep, “You’re doing a hell-of-a job Brownie!”.

  33. Eclectic commented on Aug 12

    Stormrunner,

    I’d read that piece about Minsky on Roubini and generally agree with your acceptance of the thesis.

    It seems that in every way possible you object to our current system of credit creation via a central bank. I would agree with you under certain conditions:

    Were we to still exist economically as a society in a manner, while civilized certainly, as we did long prior to the industrial revolution, I would agree with you almost 100%. In that world mankind needed only a relatively minor intellectualized understanding of the concept of money (read all my theory on this blog). Rather than conceptualizing money as what it truly is: labor, either mechanical or intellectual, he was safely able to conceptualize it as a perfect storehouse of value, because it was perfectly interchangeable with other non-money commodities that he might have on occasion elected to use a-s money. He was able to rely on its tangible aspects and ignore the philosophical and psychological. It was almost as if he could elect to either eat it… or spend it.

    In most of his economic existence the absolute preservation of relative value against other non-money commodities s-u-b-s-t-i-t-u-t-a-b-l-e for money was very important, if not critical. This was Thomas Jefferson’s reason for objecting to centralized banking currency issuance… but only because he couldn’t conceptualize what money really was.

    Unfortunately, after the industrial revolution, and after its specialization of labor (Adam Smith’s pin factory) and extreme urbanization, mankind no longer lives a natural life (indeed, maybe hasn’t for hundreds of years), but an artificial economic life that distorts the way he needs and uses money. If you don’t think I’m right about defining it as artificial, then how is it that it could be natural for a crew of a very few men to farm 10,000 acres of wheat or corn.

    Consequently, no hard money can serve as the basis for his money species today (supply not quickly reactive to changes in demand), and thus fiat is the only way that money can effectively exist in an industrialized and urbanized society.

    Because of this I can only agree with you maybe 10%, and that agreement supposes the responsible control of the central bank on its own actions that govern credit creation. It’s been a very good system but merely abused, and Ron Paul’s ideas about non-deb central banking are just as subject to abuse.

    Now we’re getting somewhere, because Minsky was really addressing a condition that needed failed responsibility of the central bank, and there you won’t get much of an argument from me regarding this accommodative Fed during the last at least 10 years and maybe since the time of the last and most responsible Fed Chairman we’ve had… Paul Volcker.

    This housing nightmare belongs to the Fed… They created it on their night watch and they were asleep on duty.

  34. Winston Munn commented on Aug 12

    Stormrunner:

    The are two primary emotions that drive human behavior: desire for gain and fear of loss.

    In a credit cycle, as gains apparently become easier and easier to master, desire for gain simply overwhelms fear of loss.

    Imagine a rookie racecar driver at Indianpolis for the first time – instead of blasting down the straightaways at 200 mph, he soft pedals at 180, with a vivid picture in his head of all the crashes he has previously witnessed. But over time, as he successfully negotiates the track, his confidence increases and he slowly begins to increase his speed. After a few years with no crackup, he is a veteran driver, full of confidence, blowing down the track at 200 mph and wondering why he can’t get another 5-10 mph out of his car.

    His focus has changed from avoiding serious injury (fear of loss) to winning the race (desire for gain).

    Over time, as the race has produced no serious wrecks for a few years, all other drivers and owners and crews begin to have the same attitude – we all need to go faster to win. Cars are better than they used to be. The track is better. Drivers are better. In short, it’s different this time and we can push the envelope.

    And then the day arrives when a car spins out, slams into the wall, causing a massive pileup and a driver is killed while others are seriously injured.

    Fingers are pointed and blame is placed. Calls are made for new safety regulations.

    The carnage does not have the same effect on all drivers. The next time the race is run, some will be cognizant of fear of loss while others are still driven by desire for gain. This causes a divergence in speeds – it was actually safer in a sense when everyone was driving under the same set of emotions.

    Of course, another spectacular crash occurs. And when the smoke clears, regulations are in place to cap the speed of the cars, test the drivers, replace the track surface, and limit the miles of the race.

    Fear of loss has overwhelmed desire for gain. And then the process repeats.

  35. Winston Munn commented on Aug 12

    Eclectic:

    I concur, for what that is worth. Although I have pronounced myself a constitutionalist, and some may have extrapolated from that I believe a commodity-backed currency is necessary, this is not so. (If I ever wrote such I don’t remember doing it, and if I did I was drinking at the time.)

    When I say constitutionalist, I simply mean that I believe strongly in the rule of law. The constitution was created with methods to make lawful changes of itself, so to say it is inviolate is to say it was wrong to allow legal changes.

    There is no doubt that “money”, whatever its form, is simply the accepted medium of exchage for units of productivity, i.e., labor. It can be gold, silver, paper, or discarded Chinese restaurant menus – it is irrelevant the mechanism of valuation.

    You touched on the problem with fiat currency – it is not the currency itself but the manner in which it is created. History shows that fiat currencies always fall to zero value – but as the value is based on productivity, fiat money can never reach absolute zero; however, expansion of the supply can reduce the fraction of labor represented. That, history also shows, is what has truly caused the demise of fiat-based economies.

    The downfall of fiat economies is based on the government’s ability to make wars by debt. Monetizing that debt creates a supply imbalance that reduces the amount of labor represented by the currency.

    I disagree that Jefferson could not grasp the concept of money; I believe that Jefferson understood humananity well enough to know that the temptation of fiat to a government was simply impossible to control without a strict imposition on government’s ability to borrow.

    It appears he was right.

  36. stormrunner commented on Aug 12

    Eclectic – Winston

    Thanks for your pensive replies.

    It seems that in every way possible you object to our current system of credit creation via a central bank.

    No my only objection is that the central bank is privately held. Being privately held ensures being privately controlled regardless of the governing mechanism. Even though full government ownership, by the people, is subject to the same misallocations. I believe oversight would be much more transparent if the blame can be properly placed and the responsable parties sanctioned or removed from their posts. This is not possable in a system were the processes for money and credit creation belong to private cartels. There is no basis in our law for these private cartels. Our supreme court has already spoken to this, with the exception of the banking system. I also believe new money should be spent into the economy not borrowed from someone who does not possess the very thing he purports to lend, at a profit no less via the miracle of fractional reserve banking. I know you frown on that monetary reform act I wonder if what you object to could not be repaired. It seems that we have democracy in governing the rule of law but the other most important aspect of civilized society – monetary policy is completely left to private ownership with a facade of public control.

  37. wunsacon commented on Aug 12

    >> Neither businesses nor individuals wanted to spend. So Greenspan lowers rates to 1% to stimulate the economy. What else could he do?

    How about “not lower it for so far or for so long”? The 2000-2001 recession and 911 didn’t end of the world. Ironically, the “medicine” from Greenspan and Bush on those respective matters has been worse than the disease.

  38. Eclectic commented on Aug 12

    Storm,

    When you quote me, please identify it as a quote. Otherwise you entirely transpose my meaning to those who have not read all of my comments.

    When you reply to something I said, I already know that I said it, therefore you don’t even need to reproduce it. You should quote it only so that other’s will know I said it.

    Your remarks make it sound like Winston and I have both claimed objections to credit creation via the central bank. Anything but.

    Winston’s possibly an agnostic on the matter. I’m on the other hand a born-again advocate of it. Society wouldn’t exist without it. If you want to go back to the jungle, Ron Paul’s got the financial system that’ll work for you. I think it’d be sort of like he’d keep the special dope in a cave, guarded religiously by “defenders of the dope” and allocate it out just when it was convenient to Ron Paul to do it.

    I heard him interviewed the other day. He’s a very intelligent man and he’s indignant about irresponsible central bank actions (and fiscal as well). I’m indignant as well, but not about the system, but rather the failure of its administration.

    Too, Storm, your claims that credit creation is in private hands is absurd. Often poorly administered certainly, but not private. I don’t think Bernanke sees it as an objective of the Fed to save any particular institution, except the financial system itself.

    I’ve already said… most of the failure of the Federal Reserve OMC is s-t-r-u-c-t-u-r-a-l because it has imposed on it multiple objectives that run contrary to each other. Consequently you can’t blame the Fed when it alternately pursues one of its objectives that doesn’t fit your particular liking at the time.

    You still tend toward conspiracy I’m afraid.

  39. stormrunner commented on Aug 12

    Eclectic

    These are not my claims these are the claims of learned men far surpassing my knowledge of the subject. It just happens I agree with them that we should not be paying interest on something that did not existg prior to issuance. As for banks charging interest once they accumulate said issuance through deposits whatever that can be left to the free market. And as to the contention that the FED is a Government entity why is it listed in the phone book in the private pages rather then the gov section along with Federal Express. I realize these are cliche’ but your academic opponents seem to differ with you. And no one has made a case to me as to why Private Banks are allowed to issue a nations currency at interest. To say they are in the government domain is what would seem absurd to me. If they were, then the interest charged would be a debit on the peoples books rather than a credit. There are just too many acamdemics that espouse this position for it to be patently false

  40. stormrunner commented on Aug 12

    Don’t get me wrong Eclectic I agree with most everything you convey post issuance, your models, your psyc analysis, all of it. I just can’t seem to get past the currency creation part. In the next thread I post a thread from itulip listing the times the government has in fact issued debt free money skirting the FED all together.

  41. Eclectic commented on Aug 12

    Let’s just move on… but how about giving me those links again… not the long video but the “suggestions” video. I’d like to put some more thought on it the subject.

  42. stormrunner commented on Aug 12

    There are no videos I know of to describe implementation just the Monetary Reform Act you’ve already reviewed which obviously needs work. Most videos and literary works only decribe the pitfalls of the current system. Like “Money as Debt”

    I was reading this today which the tail end of it seems to support the advantages of a Debt-Free state issue currency.
    http://www.levy.org/pubs/wp252.pdf

    Another example of academics illustrating concepts I believe make sense and appear to support the position I lean toward.

    _____________________________________

    By definition, whatever is technically feasible in a nonmonetary economy can get done. If the
    pharaoh observes there are some idle men about, he puts them to work to build a pyramid. Financing can never
    get in the way of pyramid-building, although insufficient quantities of real resources or lack of technical
    know-how can act as real barriers. It is only the modern economy that appears to be financially unable to do
    what is technically possible. The US and Japan and Germany are supposed to have to suffer unemployment
    because they all are too poor to put the unemployed to work because their governments are “broke”–they
    simply do not have the money to employ those without jobs.

    As the state or chartalist approach to money demonstrates, this is nonsense. Governments issue money to buy
    what they need; they tax to generate a demand for that money; and then they accept the money in payment of
    the tax. If a deficit results, that simply indicates the population wishes to hoard some of the money. The deficit
    is of no consequence to the government; it merely allows the population to save in the form of government
    money. If the government wants to, it can let the population trade the money for interest earning government
    bonds, but the government never –needs to borrow its own money— from the public. Taxes and bonds, therefore,
    have nothing to do with financing a government’s spending, and, indeed, are after the fact as they necessarily
    follow spending rather than precede it.

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